Google told investors it needs to pay more money to an unspecified ‘partner’ — and it looks a lot like Apple

Google traffic acquisition costs are increasingGoogle said the increase was due to changes in partner agreements and the shift to mobilePart of the increase appears to be driven by a new deal to be on the iPhone’s Safari browser

Wall Street usually frowns on rising costs, even at a company like Google, which generated $28 billion in revenue during the third quarter and is sitting on $100 billion in cash and short-term securities.

In this case though, Google’s forecast of increasing expenses left many analysts just scratching their heads, trying to figure out what’s going on.

Ruth Porat, Google’s finance chief, prompted a series of queries from analysts when she warned at the start of the company’s earnings call that Google’s traffic acquisition costs, or TAC, are expected to increase as a percentage of revenue going forward. TAC represents the money the company pays PC makers, phone manufacturers, and other websites to promote its services and steer more clicks to its sites.

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Alphabet CEO Ruth Porat

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Google

In fact, Google’s TAC has already been climbing. In the third quarter, such costs rose to 23% of Google’s total ad revenue, up from 21% in the year-ago period.

Porat explained the increase as the result of “changes in partner agreements” and the shift to mobile computing. But she refused to provide more details about those agreement or the partners involved when prodded by analysts.

All roads lead to Cupertino

One theory is that Google’s rising TAC is a result of a new agreement with Apple.

Google has a long-running deal with Apple that makes Google the default search engine on the iPhone’s Safari web browser. Thanks to that deal, whenever iPhone users search for something in Safari, they’re directed to results on Google’s website.

That privilege didn’t come cheap, and according to a recent analyst report, it’s becoming more and more expensive for Google. Bernstein analyst Toni Sacconaghi estimated that while Google paid Apple $1 billion in 2014 as part of their deal, its total payments to Apple may now be closer to $3 billion, according to a CNBC report in August.

If so, that could help explain the rising TAC Google reported.

“TAC growth continues to outpace accelerating Google sites growth, due in part to recent changes in partner agreements (presumably Apple),” wrote Baird analyst Colin Sebastian in a note to investors on Thursday.

Macquarie analyst Ben Schachter said he wasn’t able to directly tie the increase to a new Apple deal, but noted the increase was “clearly very likely from mobile and Apple overall.”

It’s not an existential threat

Whatever the case, the rising TAC illustrates an opportunity and a weakness for Google.

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Google CEO Sundar Pichai

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Justin Sullivan/Getty Images

Because Google is dependent on Apple for a valuable pipeline of traffic, it’s in a difficult position. Apple can essentially call the shots.

“It is not an existential threat, but it is a cost that will continue to rise,” Schachter told Business Insider in an email.

Google knows the value of these TAC deals and it knows when it can forego them, as it did in 2014 when it walked away from its deal with Mozilla. The agreement made Google the default search engine in the Firefox web browser, but Yahoo opened its wallet to steal the deal from Google, and Google allowed it too.

Since then, Firefox’s share of the browser market has continued to languish. Yahoo was acquired by Verizon. And Google’s revenue has continued to grow. In other words, Google made a smart bet and saved itself some money.

The iPhone is much different than Firefox. And Google investors seem to think even a more costly deal with Apple is a small price to pay for Google to continue to be a prime destination in a world of diverse smartphones and mobile devices.